Traditionally, this is the time at which we recommend you take stock of tax and-finance for you, your family, and your business. A strategic review before the end of the tax year on 5 April 2021 may suggest ways to structure your affairs more efficiently and make the most of your tax position.
Some planning points this year-reflect the impact of the pandemic.
Here is a detailed guide for year-end tax planning.
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SKS Year End Tax Planning Guide
1. YEAR END TAX
PLANNING GUIDE
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2. Traditionally, this is the time at which we recommend you take stock of tax and
finance for you, your family and your business. A strategic review before the end of
the tax year on 5 April 2021 may suggest ways to structure your affairs more
efficiently and make the most of your tax position. Some planning points this year
reflect the impact of the pandemic.
With devolved powers, tax rates and bands can now vary across the UK. For England,
Northern Ireland and Wales, click here to see . Although the Welsh Government has
powers to set different rates of income tax, it has maintained the same rates as
England and Northern Ireland. For Scotland, please refer here. Additional rate tax is
payable on taxable income over £150,000 for all UK residents. It is paid at 46% in
Scotland (‘top rate’ tax) and 45% in the rest of the UK.
TAX RATES AND BANDS
Key Tax Allowances
Personal Allowance (PA): the standard PA for 2020/21 is £12,500. If your adjusted
net income is more than £100,000, the PA is restricted. This reduces your PA by £1
for every £2 of adjusted net income over £100,000. You lose the PA altogether when
adjusted net income is more than £125,000. Broadly, adjusted net income is total
taxable income before personal allowances, but after certain deductions like Gift Aid
payments.
Tip: How Pension Planning can Help
Pension payments are an allowable deduction in calculating adjusted net income.
They can facilitate access to a lower tax band, or help avoid loss of the PA.
Consider if you have scope to make a personal pension contribution by 5 April.
Dividend and Savings Allowance
The Dividend Allowance (DA) means the first £2,000 of dividend income is tax free.
The Savings Allowance (SA) allows you to earn a certain amount of interest, like
bank and building society interest, tax free. The level of your allowance depends on
which income tax band you are in. Basic rate taxpayers can get up to £1,000, and
higher rate taxpayers up to £500. Additional rate taxpayers do not qualify for the SA.
Please be assured that we are always on hand to advise and keep you up to date with
tax and finance measures as they unfold. Throughout this publication, the term
spouse includes a registered civil partner. We have used the rates and allowances for
2020/21.
YOUR FAMILY, TAX EFFICIENCY
3. Tax Efficient Couples
Spouses are taxed separately, each having their own allowances, tax rates and bands.
Aim to use the personal allowance, SA and DA for each of you, if possible. If one of
you pays tax at higher or additional rate, and the other at basic rate, effecting this
type of planning successfully can be particularly beneficial.
These tips can help:
Transfer Capital: Transferring capital, which then generates £1,000 savings income,
from a higher rate taxpayer (who has £1,500 of savings income, and has used their
£500 SA in full), to a basic rate spouse (who has no other savings income), could
thus save £400 per annum.
Gift Aid It: If adjusted net income exceeds £100,000, PA can be restricted. A Gift Aid
donation could be used to bring income below this threshold, to retain the allowance.
This means that where there’s both a higher rate, and basic rate taxpayer, in a couple,
it’s usually best for the higher rate taxpayer to make any Gift Aid donation.
Work as a Team: If you work for yourself, employing your spouse, or taking them into
partnership could redistribute income in a tax efficient manner. If employing your
spouse, make sure decisions are commercially justifiable and that you actually pay
the wages. A book entry isn’t enough.
And children
It may be tempting to transfer an income-producing asset to a child to save tax. But if
the child is under 18, any annual income more than £100 (gross) will still be taxable
on the parent. If, however, a gift is made by a grandparent or other relative, the
income is taxed on the child. This could use your child’s tax bands and allowances
efficiently.
Tip: Child Benefit for High Earners
Child Benefit is clawed back through the High Income Child Benefit Charge
(HICBC) where either you or your partner have adjusted net income over
£50,000 during the tax year. For incomes above £60,000, all Child Benefit
payment is lost. Look to tactics to keep the income of each parent below
£50,000 in order to keep full payment.
Tip: Four Nations
These two allowances are the same for UK taxpayers in all parts of the UK.
4. PLANNING FOR THE FUTURE
Pensions
Pensions provide significant planning opportunities. For directors of family
companies, they can bring an advantage both ways. The company making employer
pension contributions for the director should get tax relief, provided the overall
remuneration is commercially justifiable: the director receives a benefit free of tax
and National Insurance.
Pension contributions made by individuals whether as employees, directors or in
business on their own account, attract higher and additional tax relief, provided the
individual has sufficient relevant earnings to support the contributions. Earnings
generally means employment and self employed trading income.
Non-taxpayers can also benefit from making pension contributions. In order to qualify
for tax relief on personal pension contributions of up to £3,600 (gross) pa, earnings
are not required. In practical terms, £2,880 can be paid into a qualifying pension
scheme, which, with the addition of £720 basic rate tax relief, creates a pension
investment of £3,600. This can provide a pension pot for non-working spouses or
other family members. It can also be considered for someone with profits from a
property investment business, which are not generally classed as earnings.
The annual allowance (AA) is the maximum you can pay into a pension in the
tax year and still get tax relief. In 2020/21, it is £40,000. It can be lower if you
have already flexibly accessed a pension pot or have a high income (below). It’s
not a per scheme limit, so if you have more than one pension scheme, any
contribution made, whether by you, an employer, or any other party, counts
towards the overall limit. Contributions above the £40,000 AA are potentially
charged to tax as the top slice of your income. Most individuals and employers
take steps to limit pension saving to keep below the AA, rather than fall within
the charging regime.
Annual Allowance
Tip: unused AA
If you want to make significant pension contributions in one tax
year, but made smaller contributions in earlier years, the rules
around carry forward of unused AA may work for you. They have
particular potential if you are self-employed and earnings vary
significantly year on year.
5. The rules mean you can contribute more than the AA in the tax year and still get tax
relief by accessing any unused AA for the previous three years, starting with the
earliest. We are happy to advise further here.
Change for High Earners:
There are special rules (and complex calculations) for high earners, for whom a
lower, or tapered AA can apply. The taper reduces the AA by £1 for every £2 of
adjusted income over the adjusted income threshold. From 6 April 2020, there are
increases to the income limits used in the calculations, and to the minimum tapered
AA.
Adjusted income rises from £150,000 to £240,000. That’s broadly total taxable
income before deducting taxpayer pension contributions, but counting employer
contributions. Threshold income also rises from £110,000 to £200,000: broadly, total
taxable income after deducting taxpayer pension contributions, and excluding
employer contributions. The minimum tapered AA falls from £10,000 to £4,000. The
changes will impact those with earnings more than £300,000. If your threshold
income is £200,000 or less, the taper should not affect you in 2020/21.
When?
Currently, you can access defined contribution (also known as money purchase)
pensions from the age of 55. This age limit will change, rising to 57 from 2028. You
can access funds earlier, for example because of ill health: but using funds before
the minimum age generally attracts a 55% tax charge. Generally, up to 25% of pension
funds can be taken as a tax free lump sum, with any balance being taxable income:
do talk to us first, to ensure tax efficiency.
Tax Free Saving for Children
Children have their own personal allowance; savings and basic rate bands; and
capital gains tax annual exemption. Junior ISAs offer an opportunity for parents and
other family members to invest for tax free income and growth for the future benefit
of their children. Budget 2020 more than doubled the amount that can be saved in a
Junior ISA in any one tax year. From 6 April 2020, this is £9,000 rather than £4,368.
Personal pension contributions, up to the £3,600 limit, with tax relief, can also be
made for children, as outlined above.
Please contact us for advice tailored to your personal circumstances.
Bespoke Planning
6. TAX EFFICIENT INVESTMENTS
There are a number of investments with tax relief pertaining, which we bring to your
attention at this time of year. The venture capital schemes offer tax relief to
individuals to encourage investment in relatively newly established entrepreneurial
companies and social enterprises. The schemes designed for investment in individual
enterprises are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment
Scheme (SEIS), and Social Investment Tax Relief (SITR), although the latter currently
stands to be withdrawn in April 2021. For the private investor, the Venture Capital
Trust (VCT) scheme spreads the risk of investment, with investors subscribing for
shares in VCTs which are companies listed on the London Stock Exchange and run by
venture capital fund managers. The generous tax relief available accrues because
these investments have a higher risk profile. Professional advice and research into
the specifics of any proposed investment are therefore important.
Both EIS and SEIS provide income tax relief on new equity investment in qualifying
unquoted trading companies. For EIS, it’s 30% relief on investments of up to £1
million, and £2 million, if at least £1 million of this is invested in knowledge-intensive
companies. For SEIS, up to 50% relief on investments up to £100,000. CGT exemption
is given on qualifying shares held for at least three years. Capital gains realised on
the sale of any chargeable asset, including quoted shares and holiday homes, can be
deferred where gains are reinvested in EIS shares. If shares are disposed of at a loss,
Share Loss Relief may be available, and we should be pleased to advise further here.
SAVINGS : NICER WITH AN ISA?
Individual Savings Accounts (ISAs) provide a useful tax free savings opportunity.
There’s a maximum to the amount that can be invested in ISAs in any tax year. For
2020/21, this is £20,000. There are four different types of ISA: cash ISAs, stocks and
shares ISAs, innovative finance ISAs and Lifetime ISAs (LISAs). You can invest in one
of each type, each tax year, subject to the overall maximum. Savings held within an
ISA are free of income tax and capital gains tax.
There are also Junior ISAs for children under 18 (see elsewhere in this Guide).
Tip: Get the Most out of ISA Limits
You can’t carry your ISA limit forward. If you don’t use it in one tax
year, it’s lost. Consider before the end of the tax year on 5 April
2021 whether you and other family members want to take
advantage of the ISA limits.
7. Tip: Help The Next Generation on the Property Ladder
You might want to help the next generation of your family save into a LISA.
From an inheritance tax (IHT) planning perspective, this could be treated as
a transfer of income, not capital, if you can qualify using the ‘normal
expenditure out of income’ rules. Alternatively, you could use your IHT
annual exemption to cover £3,000 of capital gifts each tax year. Although
comparatively few estates actually pay IHT, the rules are complex and we
should be pleased to provide advice on the issues relevant to you.
Tip: Share the Disposals
You must use or lose your exempt amount each tax year. You can’t carry it forward
if you don’t use it. But if you’ve already used your exemption, and your spouse
hasn’t, and you own an asset that’s to be disposed of, consider transferring it to
your spouse to dispose of. Assets can usually be transferred between spouses at
no gain/no loss, meaning there is no immediate tax charge on the transfer.
To determine the rate of CGT payable, net chargeable gains are added to your
income, and a higher rate applies to gains (or part of them) in as much as they
exceed your basic rate threshold. So if you are thinking of disposing of an asset
and you would be paying a higher rate of tax on the gain, and your spouse is a
basic rate taxpayer, an inter-spouse transfer could make a good first step .
It’s important to get the detail right: do please discuss any disposal with us
first to make sure it’s effective for tax purposes.
LISA's are open to those aged 18 to 40, and are designed to be used to purchase a
first home or save for later life. The most you can invest in a LISA each year is
£4,000, though you can use the rest of your ISA limit to invest in a different type of
ISA. The government adds a 25% top up to LISAs, capped at £1,000 each year.
CAPITAL GAINS : WHY IT MATTERS WHO DISPOSES OF AN ASSET
From 6 April 2020, the annual exempt amount for capital gains tax (CGT) for
individuals rose to £12,300. Each spouse has their own exempt amount.
8. If you’re a taxpayer, giving to charity under the Gift Aid scheme means your charity
ends up with a bigger donation by claiming back 20% basic rate tax on the gift. If you
pay higher or additional rate tax, you can benefit, too, by claiming back the difference
between higher or additional rate tax paid and basic rate. Different tax rates apply in
Scotland, but the principle is the same. Higher rate tax relief is normally given in the
tax year in which a donation is made. So a Gift Aid payment made by 5 April 2021
would get tax relief against income of 2020/21. With this in mind, you might want to
consider whether making such a donation would be beneficial to your overall tax
position.
It is possible to carry back donations made between 6 April 2021 and 31
January 2022 against 2020/21 income. But strict timing rules apply. Carry back
elections are best made on the self assessment tax return, making it prudent to
think in terms of the self assessment timetable. To carry back against 2020/21
income, you would make the election on your 2020/21 tax return, the final filing
deadline for which is 31 January 2022. Once filed, it’s no longer possible to
make a carry back election, nor change one already made. Another important
point, particularly relevant for larger donations, is that carry back can’t be used
for part of a gift; it must be used for the whole sum.
The pandemic has impacted many people’s finances. If you have signed a Gift
Aid declaration for a charity you regularly support, check you will pay enough
tax to cover it. Any shortfall between the tax reclaimed by the charity and the
tax you pay must be made good to HMRC, so if necessary, cancel the Gift Aid
declaration. Tell the charity that you wish to do so before making a further
donation. More detail on cancelling Gift Aid declarations is here
Tip: Will You Pay Enough Tax?
THE DEVIL IN THE DETAIL: GETTING GIFT AID RIGHT
9. Covid-19 has created a tough business climate for many family companies.
Additional problems may arise if the loan account of a director, who is also a
shareholder, has become substantially overdrawn.
If a close company (essentially, one controlled by its directors, or by five or fewer
shareholders), makes a loan to a shareholder, it can give rise to a tax liability for the
company. Where a loan is not settled within nine months of the end of the accounting
period, the company is required to make a payment equal to 32.5% of the loan to
HMRC. You may sometimes see this referred to as a s455 tax charge. A loan can also
have implications for the individual director, too, with a possible benefit in kind
charge.
Broadly speaking, if the director-shareholder repays the loan balance within nine
months, there is no charge on the company. In the past, this would usually be done by
voting a dividend, or paying a bonus to clear the loan account. This year, many
companies may find it difficult to do so. A director-shareholder may be tempted to
take on short term credit, using it to repay the overdrawn balance on the loan
account; the company would then provide another loan, shortly after the nine-month
date, to facilitate repayment of the short term credit. However, complex anti-
avoidance rules exist to catch arrangements like this. If you are concerned whether
the tax charge could apply to your company, please do talk to us.
For those family companies in a position to pay dividends, the following planning
points remain:
Timing of dividend payments: From a shareholder perspective, a dividend payment in
excess of the Dividend Allowance (DA), delayed until after the end of the tax year on
5 April, can provide an extra year to pay any further tax due. The DA is £2,000 for
2020/21. The deferral of tax liabilities on the shareholder depends on a number of
factors. Do please contact us for further advice.
Proper procedures around dividend payments: Company law requires the company to
be able to justify any distribution by reference to the last annual accounts, or in
certain circumstances, interim accounts. The directors should be satisfied that the
company will continue to be solvent after the dividend payment is made.
Structuring shareholding carefully can keep open the option to claim what used to be
called Entrepreneurs’ Relief, and is now called Business Asset Disposal Relief, when
you eventually dispose of the business.
Disclaimer - for information of users: This Briefing is published for the information of clients. It provides only an overview of the
regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking
professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material
contained in this Briefing can be accepted by the authors or the firm.
TIPS FOR FAMILY COMPANIES NOW